What are you to do if it happens to you? Not much, but you can do a lot to be prepared for it, when it happens, and even avoid it.

The first obvious question is what makes the IRS pick one tax return over so many others?

Well, although the IRS are rather discrete on the subject, the “random” selection of returns is based on a few methods they admit using to choose tax returns for examination:

Computer scoring. The Discriminant Function System score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF score rates the return for the potential of unreported income. 

The IRS issues a publication called “Statistics of Income”, updated on a quarterly basis. Articles included in the publication provide the most recent data available from various tax and information returns filed by U.S. taxpayers.

Your return is assigned a numerical score that is arrived at by determining how much your return differs from similar returns and the potential for having unreported income.

IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.

Potential participants in abusive tax avoidance transactions — Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. 

Large Corporations — The IRS examines many large corporate returns annually.

Information Matching — Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return.

Related Examinations — Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination.

Other — Area offices may identify returns for examination in connection with local compliance projects. 

That’s all there is to say about the IRS methods in selecting returns to be audited. It is of great importance, though, to know what factors may trigger a potential IRS audit.

There is no sure way to avoid being selected for an audit, nevertheless, statistics of previous audits help draw a list of red-flags factors which may draw unwanted attention from the IRS.

The focus is on high-income taxpayers because a high income gives a higher potential for the IRS to collect money. Specialists say that the chances of an audit for those making less than $100,000 is only .93% while those making $200,000 per year bring the chances up to nearly three percent. Those earning a million dollars have a chance as high as ten percent of being audited.

• Very high deductions. If deductions on your return are extremely high compared to your income, the IRS may want to examine the legitimacy of your deductions. Here we can include:

The IRS will contact you by mail or telephone, never by e-mail notification. The audit itself may be conducted by mail or through an in-person interview and review of your records.

It is important you read the IRS Audit Notice carefully. This document provides a list of questions the IRS has about your claim (or claims) and the documents you must provide. Make sure you understand what the IRS is requiring from you and which documents you must provide (and the specific tax years) to substantiate your return's entries.

Try to be as cooperative as possible, but do not provide more documents than requested. Although you are ultimately responsible for the information in your tax return, don’t hesitate to contact your tax preparer and ask them to be present for your audit. The IRS is very specific about your rights as a taxpayer, and these include:

A right to professional and courteous treatment by IRS employees;

A right to privacy and confidentiality about tax matters;

A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided;

A right to representation, by oneself or an authorized representative;

A right to appeal disagreements, both within the IRS and before the courts.

Being selected for a tax audit doesn’t necessarily mean you have done something wrong or even that there is any mistake.

• Keep at least three years’ worth of tax returns and records;
  

• Keep and categorize all your significant receipts and bills;
  

• Track cost basis for property and taxable investments;
  

If there is some serious fault in your returns, you may face one of the following penalties:

20% penalty for the portion of any tax underpayment associated with overvaluation or undervaluation of property, negligence, disregard of IRS rules and regulations, and substantial understatement of tax liability;

75% penalty for much more serious tax underpayments that are due to fraud.

For violations such as fraud, negligence, failure to file on time and over or undervaluation of property, interest will accumulate from the due date of your return (including extensions) until the date the penalty is paid. For other penalties, interest is not charged if the imposed penalty is paid within 21 days (for penalties under $100,000).

In the most serious cases of tax evasion and other tax crimes, a conviction can result in much more significant fines, the forfeiture of assets/property and possibly incarceration.

Although tax audits can get unpleasant, you don't need to dread them if you've kept your financial records organized, up to date and above board.

If you are chosen for an audit, make sure the examination is scheduled far enough in advance for you to get ready. Solid preparation should enable you to get through the audit with a minimal amount of stress. And professional assistance will probably be a worthy investment.